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he current economic crisis facing the United States (and the typically obtained before a transaction closes and the lender- world, for that matter) is also impacting the casino gaming borrower relationship begins. T industry. The reason for this is that many institutional Loans to licensed gaming companies often create a unique investors on Wall Street, as well as private equity firms and large situation that impacts a lender’s ability to foreclose on the collateral. national/international banks, either own equity in or have lent For instance, lenders cannot assume control of a Nevada gaming money to public and private gaming companies. business without prior gaming regulatory approval. Moreover, Further impacting the situation is that many of these commercial certain gaming assets can’t be transferred without prior gaming loans were made in the last couple of years and with high debt regulatory approvals. leverage ratios, in anticipation that casino revenues would stay at Sophisticated borrowers may attempt to use the gaming historical levels. The recent drop in casino revenues is likely to result regulatory structure to their advantage against unsophisticated in many gaming companies not being able to meet their income lenders. A borrower can use a lender’s inability to take over gaming covenants and other potential defaults. This essentially results in a operations without the appropriate licenses as leverage to scenario where a gaming company might not be able to generate renegotiate the terms of a loan transaction after a borrower default. enough revenue to pay its debt obligations. Lenders also don’t want to force their hand in such an instance To relate this to a consumer situation, it is as if a homeowner because the only quick way to gain control of a gaming borrower’s purchased a $500,000 house two years ago and, at that time, had the business would be to cease gaming operations, which would income to pay the mortgage. Today, that same homeowner has adversely impact the value of the collateral. experienced a drop in income whereby he or she only has income to Negotiations between gaming lenders and borrowers often result pay for a house worth $300,000. in a bankruptcy restructure that allows the business to remain open, employees to remain employed, and the borrower and its creditors Why Gaming Companies May Need to File to explore ways by which to maximize the value of the bankrupt Bankruptcy company to maximize the return to creditors. In some instances, a As with most commercial loans, a lender to a gaming company lender and a senior borrower may agree to reorganize the company expects that the borrower will repay according to the terms of the outside of bankruptcy but must file a bankruptcy petition to achieve credit facility. These loans are typically secured against the possibility the agreement because of other creditors. of default by taking security interests in the borrower’s assets. Loan There are other common ways for a gaming bankruptcy to occur. documents also typically have financial covenants. Some types of In some cases, the borrower may voluntarily file without having security require prior gaming regulatory approval to be effective (i.e., reached an agreement with any of its lenders. In others, a group of pledges of stock of privately owned companies). These approvals are creditors may cause an involuntary filing. Either way, the bankruptcy 32 Casino Enterprise Management MARCH 2009 www.CasinoEnterpriseManagement.com By Bruce Beesley, Sean McGuinness and Tricia Darby becomes a venue for determining how the debtor will be reorganization process. In this instance, the bankruptcy court restructured and what happens to its assets. may order a Section 363 sale of the debtor’s assets, which Within the confines of a bankruptcy action, rights of foreclosure results in the property being marketed for sale. In such an may ultimately come into play and be exercised under the umbrella instance, a stalking horse bidder will be solicited and an auction of the bankruptcy court. The gaming regulatory agencies and the will take place. In this scenario, the equity owners of the debtor bankruptcy courts work in tandem to administrate gaming are able to participate in the auction and bid for the assets. bankruptcies that are in the best interests of the bankrupt estate in a Examples of this type of bankruptcy are The Resort at manner consistent with gaming laws and regulations. Summerlin and Stateline Casino. In both of these instances, the casinos were able to stay open with the agreement that a sale Types of Gaming Bankruptcies process would be initiated right away. There are three types of bankruptcies that are typically filed by casino debtors: 3. Chapter 7 liquidation with a debtor doesn’t generate positive cash flow and doesn’t have the ability to obtain 1. Chapter 11 reorganization with a debtor generates debtor-in-possession financing to continue operations. In this enough cash flow to continue operations and/or has significant type of situation, the bankruptcy court and the gaming debtor-in-possession financing to justify the bankruptcy court, regulators work together to appoint a trustee to take over allowing the debtor to continue to operate during the operations and make efforts to liquidate or sell the assets. bankruptcy and allowing the debtor to offer a plan of Examples of this type of bankruptcy are The Maxim Hotel and reorganization to its creditors and to the bankruptcy court. Casino and Fitzgeralds Reno (when it was the sole remaining Examples of this type of bankruptcy are Stratosphere Casino asset of Fitzgeralds Gaming Corporation that couldn’t be sold and Hotel, Fitzgeralds Gaming Corporation and the Aladdin when the buyer declined to purchase that property along with Casino and Hotel. In each of these instances, the casinos were the other three). able to stay open and continue operations while a reorganization plan was circulated to the creditors and the court. Regardless of the type of casino bankruptcy, once a bankruptcy is filed, the fiduciary duty of the operators of the casino shifts from the 2. Chapter 11 reorganization with a debtor that either does equity owners of the company to the bankruptcy estate itself (and, not generate enough cash flow to continue operations or does more specifically, to all of the creditors). The point here is that the not have adequate debtor-in-possession financing to fund casino’s operations should be allowed to continue so as to maximize the bankruptcy long enough to go through a plan of revenues in order to make it more likely that all creditor constituency www.CasinoEnterpriseManagement.com MARCH 2009 Casino Enterprise Management 33 bankruptcy case, the debtor will propose a plan of reorganization based on its negotiations with creditors. There are several restructuring alternatives available to casino debtors seeking protection under Chapter 11 of the Bankruptcy Code. Among the alternatives are refinancing outstanding debts, selling assets pursuant to Section 363 of the Bankruptcy Code or a plan of reorganization, or converting debt to equity. Most plans of reorganization will include a combination of these restructuring groups are able to recover as much as possible. Generally, alternatives. the prior owner’s equity is wiped out and is worth nothing, as the In many cases, the easiest restructuring alternative available to a equity is last in priority to be paid out (i.e., all creditors would need casino debtor is to refinance its existing debt. Lenders need to be to be paid in full to allow any payment to the equity). aware that, as with the initial debt transaction itself, when a casino While the Bankruptcy Code technically requires that, upon the debtor proposes to refinance existing debt, the lenders are subject filing of bankruptcy protection, a casino is to cease issuing and to being called forward by gaming regulators for full suitability honoring pre-petition chips and recognize only new “post-petition investigations. Gaming regulators generally have the discretion to chips,” this is not how the issue is handled. Practically, a debtor call lenders forward for licensing, but this is rarely exercised if the casino could not compete in the highly competitive industry if it lenders are bona fide banking institutions. In was required to strictly follow certain addition, the refinancing of debt may require requirements of the Bankruptcy Code. For the gaming authorities’ prior approval of the this reason, upon the filing of a Chapter transaction. The debtor’s ability to approve 11 petition, a casino debtor will file “first- the plan of reorganization will likely be day motions” with the court. In this current dependent on the lender and/or transaction First-day motions request the being approved by the gaming authorities. bankruptcy court’s approval of various economic climate, An equity swap is another restructuring transactions that will allow it to continue it is likely that some option available to a casino debtor. In order to uninterrupted operations during the effectuate the equity swap, a significant bankruptcy proceeding, including gaming companies portion of the debtor’s creditors must accept recognition of the aforementioned pre- will file bankruptcy. the debtor’s plan of reorganization (at least petition chips. They are designed to two-thirds in amount and a majority in ensure that the debtor can maintain number of those creditors voting in the class normal business operations with whose claims will be subject to conversion customers, employees, suppliers, into equity of the reorganized). An equity customers and other stakeholders. The swap will likely create gaming licensing issues ultimate goal is to allow the debtor to for the lenders, which will vary depending continue generating funds to support ongoing operations, which upon the nature of the entity in bankruptcy (public or private) and will permit the debtor to satisfy creditors and successfully the jurisdictions in which that company does business.

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